The risks of specialized knowledge

The other day, I received an invitation to an event at the Brookings Institution called “The new American dream: Retirement security.” This seemed right up my alley, so I clicked through to see the event details. The description starts off with some generic language:

“The American dream has drawn millions to the ‘land of opportunity’ and long encapsulated the idea that every citizen has the right to improve their lives. Yet, the current state of the U.S. retirement system may threaten the ability of some to fully achieve the American dream by ensuring their health and quality of life in retirement.”

I naturally found myself nodding along, since the inadequacy of our old age insurance programs is a subject near to my heart. The description continued:

“with personal savings and investment providing the only retirement security.”

Wait, what?

Social Security is the only source of income security in retirement

It’s been a while since I’ve written about Social Security, so let’s do a quick refresher on how the program works:

any time between age 62 and age 70, you can claim an old age benefit based on your income in the highest 35 wage-inflation-adjusted years for which you reported earnings;

the longer you wait after turning 62, the higher your benefit is;

your benefit will never fall;

and your benefit is adjusted upward for inflation each year.

Because the benefit is paid in US dollars by the United States federal government, the system can never go bankrupt. This is retirement security.

Personal savings and investment provide income, not security

What is the difference between income and security?

First, income fluctuates. If your savings are in a savings account then the interest rate might fluctuate monthly or quarterly. If they’re in a CD ladder, then each time a CD matures you’re forced to reinvest the principle at the currently prevailing interest rate. If they’re in stocks, bonds, or mutual funds, then the dividends and coupon payments you receive will likewise fluctuate along with interest rates and economic conditions.

Second, income is risky. If you don’t have control over when you sell your investments, you risk selling them at depressed prices, permanently impairing your ability to generate additional income in the future.

Finally, income is vulnerable to inflation. The very safest federally insured deposits may pay little or nothing in excess of inflation, meaning to generate real income you need to draw down your principal or invest in riskier assets.

No one in their right mind should confuse personal savings and investment for retirement security. So why did the Brookings Institution?

The risks of specialized knowledge

If you said to me, “Social Security succeeded in lowering the elder poverty rate from 35% in 1965 to 10% in 1995, but some elderly people are still in poverty,” I would say, “that’s because Social Security benefits are too low and the minimum benefit needs to be raised so no seniors live in poverty.”

If you said to me, “many children in the United States live in poverty,” I would say, “that’s because children don’t earn income, while requiring adult supervision, and we need a universal child allowance that reflects that fact.”

Specialized knowledge, the kind of knowledge possessed by scholars at the Brookings Institution, makes it very difficult for people to identify problems and propose solutions that address them directly. Once you know that 401(k) accounts exist, but that most people don’t have access to them, and most people who do have access to them don’t participate in them, then it’s the most natural thing in the world to find yourself talking about how to expand access to 401(k) plans, how to increase participation, how to increase the quality of the investment options, how to ensure people are getting unbiased investment advice, etc, and calling that a set of solutions to “retirement security.”

But those questions are all downstream from, “how do we provide retirement security to elderly Americans?” That’s a question we already know the answer to: bigger Social Security checks.

Likewise, once you know the Social Security Administration collects more money than it spends and saves that money in a “trust fund” that will be used to pay benefits once outlays begin to exceed FICA tax revenue, and that the “trust fund” will be “exhausted” in 2034, then it’s natural to start frantically wondering what combination of benefit cuts and payroll tax increases will be necessary to make the program “solvent.”

But if all you want to know is “how will the federal government pay for Social Security benefits in the future?” then the answer is obvious: the same way it pays all its other bills, a combination of corporate and individual taxes, estate taxes, licensing fees, seignorage, and debt. My preference would be fewer wars, higher taxes, and less debt, while if you’re a Republican your preference might be for more wars, lower taxes, and more debt, but there’s no use pretending Social Security benefits pose some unique threat to the Republic. That is the risk of specialized knowledge.

Reader Interactions

Comments

I appreciate your post and I appreciate your desire to help those in poverty. Those are of course good goals. I’ve benefited from your posts as well and appreciate your effort.

One thing that bothers me though is how you tend to attack Republicans and conservatives when you don’t have to.

You could have just said you prefer fewer wars, higher taxes, and less debt. Which would be a valid, generalized, statement. Why did you feel the need to have to take a jab at Republicans/conservatives?

“Specialized knowledge”–aka expertise, is a good thing. It allows the construction of solutions within economic and political constraints. Its not a substitute for vision, nor the dogged determination to move the constraints closer to the vision.

I took the idea that the legs are wobbly to mean that Social Security is not that secure. There is a growing unfunded liability in the future thanks to tax cuts and an increasing population over age 62. I’m sure you’re well aware of this though. Someone who knows far more than me is necessary to fix this. The obvious answers are eliminate the maximum amount of social security earnings and/or increase the retirement age.

GOP has been expanding the debt tons in last two administration’s and shows no signs of desire to reduce debt. Obama promised to get out of Iraq and Afghanistan and instead we added Syria war to the other two by the end of his presidency. Democrats wanted us in Vietnam, Nixon won on withdrawal. Democrats currently want head on clashes with Russia and to completely break our alliance with Saudi Arabia (which would completely make lead to a huge regional war) while they sent billions to terrorist state Iran. Democratic governments nationwide have jeopardized or bankrupted government pensions. You don’t even mention that many of those covered by the government pensions don’t get Social Security.

Highest percentage of GDP tax collections have been after tax cut with Clinton and Gingrich and the one just a year ago.

You didn’t add the risk Congress raises retirement age.

You didn’t mention Medicare which is going broke faster and if they raise premiums may eat into retiree social security.

I don’t know exactly where you heard this fantasy about the tax cut increasing revenue as a percentage of GDP, that’s mechanically impossible since revenue has fallen dramatically and GDP has continued to grow, so by definition revenue has decreased as a percentage of GDP. GDP would have to fall faster than revenue for your claim to be true, which hasn’t happened. FRED has a tool you can use to visualize that here: https://fredblog.stlouisfed.org/2018/06/movement-of-the-federal-tax-receipt-front/. And of course that’s offset somewhat by the rise in tariff income which has nothing to do with the GOP tax plan.

If you don’t find out what the facts are it’s possible to believe all sorts of crazy things, so I’d just recommend finding out what the facts are before forming strong, incorrect, incoherent beliefs.

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